STOCKHOLM (Reuters) - The owner of the IKEA furniture brand expects sales to grow this fiscal year as online trade expands, but profits will be tempered by increased investment as the brand battles web specialists like Amazon (AMZN.O) and Made.com.
After decades of rapid growth the world’s biggest furniture brand is battling to adapt to new shopping habits and the rise of online rivals, while trying to maintain its hallmark affordability amid high raw material and other costs.
As a result of the online shift, costs for packaging and logistics are rising substantially for Inter IKEA Group, which supplies goods to its franchisee stores around the world, Chief Financial Officer Martin van Dam told Reuters on Friday.
“The logistics challenge for us is of course big. We’re shipping big products,” he said in an interview. “We are looking at how we can change flows - we have a team looking at how can we more efficiently move our goods around. And that means investments.”
The finance chief did not put a figure on the company’s overall investment plans beyond saying it would top the total from its last fiscal year, the 12 months to August, when it grew to about 175 million euros ($193 million).
Inter IKEA is a franchisor to store owners, of which INGKA Group is the main, and is also in charge of product development and supply. It generates the bulk of revenues from sales of goods to its retailers, and around 5% from franchise fees.
The company said it expected sales to grow this year, without specifying any figures, and van Dam said it would lower prices to its store owners as raw material costs had eased from high levels, without giving more details on pricing this year.
The CFO was speaking after the unlisted group reported a 5% increase in pretax profit to 1.8 billion euros ($2.0 billion) in its last fiscal year, as revenue held up while higher investments and a jump in online-related costs squeezed margins.
The gross margin narrowed in the year to 18.0% from 18.8%, and the operating margin to 7.3% from 7.9%.
Aside from logistics, IKEA is investing in new store formats and extra services such as furniture delivery and assembly.
Reporting by Anna Ringstrom; Editing by Pravin Char